The present paper discusses the new legal framework for the automotive distribution, which has been set by regulation 1400/2002 of the European Commission, and clarifies the underlying rationale of this so-called block exemption. To this end, the relevant market has been analysed along the structure conduct performance paradigm. Additionally, the existing trends, e. g. the changing consumer preferences, the changing technological standards, and an increasing number of independent service chains, were investigated to integrate the dynamics into the model. In this context the meaning and the impact of the regulation have been detailed with respect to consumer welfare.The analyses have shown that the new regulation complies with the guiding principles of competition policy and thus fosters competition in the industry. This stands in contrast to its predecessors, which were influenced by lobbying of the car industry and had thus laid the foundation for a heavily regulated business. As shown in this paper, a leap towards increased consumer welfare has been made by weakening the market power of the industry. Among others, the separation of sales and services, the permission of multi-brand outlets and the ban of price discrimination can be named as examples for reforms brought forward in the regulation. Furthermore, the so-called location clause will be abolished as of October 2005, which means that dealerships are allowed to open new outlets anywhere in the common market without the consent of the manufacturer. However, in the course of disallowing vertical restraints, of which some had previously helped to secure efficiencies in the value chain, a relative welfare loss has also developed. For instance, the increased free-riding issues could inspire a development to the detriment of the consumer and the convergence of prices at a high level could be disadvantageous to consumers in low income member states.
Although the regulation has already come a far way, the critique that is voiced at the end of this paper, shows that there is significant room for improvement, once the regulation expires in 2010. Key points are the price convergence towards the level of the high price countries, some inconsistencies in the regulation and a possible loss of intangible consumer welfare. In the end whether the additional welfare surplus outweighs the new welfare loss has to be decided on a per country basis.
Table of Contents
1 Introduction
2 The Car Industry Before 2002
2.1 Car Distribution
2.2 IO Analysis of the European Car Industry
2.3 Trends in the Car Industry
3 EU Competition Policy with Regard to the Car Distribution
3.1 General Motivation of Competition Policy
3.2 Vertical Restraints and Recommendations from Theory
3.3 The Evolution of the Regulatory Framework for Car Distribution
3.4 Motivation of the New Regulation
4 The Regulation 1400/2002
4.1 Process of the Analyses
4.2 Definition of the distribution systems
4.3 Analyses of Articles
4.3.1 Article 2 – Scope
4.3.2 Article 3 – General Conditions
4.3.3 Article 4 – Hardcore Restrictions
4.3.4 Article 5 – Specific Conditions
4.3.5 Article 6 – Withdrawal of the Benefit of the Regulation
4.4 Status of the Implementation
5 Market Outcome and Critique
5.1 Market Outcome
5.2 Critique
5.2.1 Price Convergence
5.2.2 Cost Increase
5.2.3 Loss of Intangible Consumer Welfare
5.2.4 Consumer Preferences towards Car Distribution
5.2.5 Inconsistencies in the New Regulation
5.2.6 Exemption from the Regulation: de Minimis Rule
6 Conclusion
7 Appendix
7.1 Welfare Analysis of Price Harmonization with Taxes
7.2 Market Shares
7.3 Full Results of Price Analysis
7.4 Price Levels 2002
7.5 Price Levels 2004
Objective & Core Topics
This paper provides an economic evaluation of the European Commission's Regulation 1400/2002, which established a new legal framework for the automotive industry. The central research question examines how this regulation influences competition and consumer welfare within the European car distribution sector.
- The Structure-Conduct-Performance (SCP) paradigm as an analytical framework for the automotive industry.
- Evaluation of vertical restraints and their impact on market efficiencies.
- Economic analysis of Regulation 1400/2002, focusing on specific articles and their implications for manufacturers and dealers.
- Market outcomes, including price convergence, cost increases, and impacts on consumer welfare.
- Strategic adjustments of market participants, such as consolidation and the unbundling of sales and service.
Excerpt from the Book
3.2 Vertical Restraints and Recommendations from Theory
Before the regulation itself is analysed, the evolution of the economic interest in vertical restraints should be understood. In the standard textbook case of economic theory – perfect competition – standard sale contracts allow the buyer to freely decide on the further use of the good purchased. Vertical restraints can be defined as any economic exchange that differs from this contract..37 From this point of view, perfect competition in vertical relationships is in general welfare maximizing as it is in horizontal relationships. Classic economic theory therefore viewed vertical restrains as a measure of the upstream firm (manufacturer) to reduce the independence of downstream firms (distributors), which in turn harmed consumers. For example, resale price maintenance was seen as little different from horizontal price-fixing.38
In this thinking, vertical restraints were imposed by upstream firms to maximize their profits. The Chicago school, developed in the 1960s and 1970s, offered a new view on vertical restraints, stressing possible positive efficiency gains in the vertical relationship and a positive effect on total economic surplus. In particular, the Chicago school addressed efficiency gains coming from the elimination of external effects, hold-up problems and elimination of double marginalization. 39 Due to the Chicago analyses, "there [was] growing acceptance of the view that vertical agreements can rarely have anti-competitive consequences".40 More recently, economic discussion again centred on possible anti-competitive and welfare-reducing effects of vertical restraints. As Comanor's exemplary work shows, not all vertical restraints can be viewed as neutral or pro-competitive.41 Particularly, vertical restraints can act as entry barriers. So with the benefits postulated by the Chicago school being shaded in doubt, academia now calls for a case by case approach to evaluate vertical agreements.42
While economic theory answers the question of welfare effects of vertical restraints ambiguously, the topic is of great interest for the regulation authorities.
Summary of Chapters
1 Introduction: Introduces the objective of evaluating the Regulation 1400/2002 and outlines the analytical framework based on the structure-conduct-performance paradigm.
2 The Car Industry Before 2002: Analyzes the market structure, business conduct, and profitability of the European car industry prior to the new regulation.
3 EU Competition Policy with Regard to the Car Distribution: Discusses the motivation behind EU competition policy and the theoretical perspectives on vertical restraints.
4 The Regulation 1400/2002: Detailed economic analysis of specific articles of the regulation and their impact on market interaction and dealer autonomy.
5 Market Outcome and Critique: Evaluates the actual market impacts, including price convergence and potential welfare losses, while identifying inconsistencies in the regulation.
6 Conclusion: Summarizes the paper's findings, noting that while the regulation is a step toward increased competition, it is not an ultimate solution.
7 Appendix: Contains supporting technical data, including welfare analyses, market shares, and detailed price tables.
Key Terms
Regulation 1400/2002, Automotive Distribution, Competition Policy, Consumer Welfare, Vertical Restraints, Structure-Conduct-Performance, Multi-brand Distribution, Price Convergence, Resale Price Maintenance, Double Marginalization, Hold-up Problem, Free-riding, After-sales Market, Dealer Consolidation, Block Exemption
Frequently Asked Questions
What is the core focus of this research paper?
The paper focuses on the economic evaluation of the European Commission's Regulation 1400/2002, which reshaped the legal framework for the European automotive distribution sector.
What are the primary themes discussed in the analysis?
Central themes include the impact of vertical restraints on competition, changes in market structure due to the regulation, dealer autonomy, and the effects on consumer welfare and price harmonization.
What is the main goal or research question?
The primary goal is to determine whether the regulation successfully fosters competition and increases total welfare by empowering consumers, while balancing the need for efficiency in the automotive value chain.
Which scientific methodology is utilized in this paper?
The authors employ the Structure-Conduct-Performance (SCP) paradigm to analyze the industry and evaluate the regulation's economic implications within a theoretical and empirical context.
What topics are covered in the main body of the work?
The main body examines the status of the industry before 2002, the theoretical foundations of competition policy, a deep-dive analysis of specific articles of Regulation 1400/2002, and a critique of the resulting market outcomes.
Which keywords best describe this study?
Key concepts include automotive distribution, Regulation 1400/2002, competition policy, vertical restraints, price convergence, consumer welfare, and multi-brand distribution.
How does the regulation address the "hold-up" problem between manufacturers and dealers?
The regulation seeks to mitigate this by strengthening the dealer's position through rights to sell their outlets and by imposing stricter requirements on manufacturers for contract termination.
What critique is voiced regarding the regulation's effect on price?
The authors note that while price convergence has occurred, it often trends toward the higher end of the price spectrum, potentially negatively impacting consumers in historically low-priced member states.
What is the significance of the "de minimis" rule mentioned in the paper?
This rule allows manufacturers with limited market power, such as Porsche, to seek individual exemptions from certain strict requirements if they can demonstrate that their vertical agreements do not significantly harm competition.
- Quote paper
- Philipp Pohlmann (Author), Jens Finke (Author), Jan-Dominik Gunkel (Author), 2004, The New Legal Framework for Car Distribution, Munich, GRIN Verlag, https://www.grin.com/document/39526
